Fund Accounting with PCS Fund

Fund accounting comprises the set of accounting practices and standards
used to organize and track the finances of not-for-profit organizations.
These practices and standards differ in significant ways from those used
by for-profit organizations. The driving force behind these differences is
the need to be able to strictly segregate and track monies received and
expended to accomplish specific purposes. To achieve this strict
segregation, accounting methods are established that utilize funds
to track financial activities.

Strictly speaking, a fund is simply a part of an organization
which can be dealt with and examined as an entity separate from the rest
of the organization. Monies received and expended by a fund may or may not
have restrictions placed on them by donors or by the organization’s Board
of Directors. For example, the Board may establish a Building Fund that
would acquire amounts by donations, grants or transfers from other funds
within the organization. Its purpose would be to allow the construction of
or improvements to building. A fund may also be associated with a
particular source of revenue. Thus, a large grant, especially if it has a
particular purpose, would warrant the establishment of a separate fund
dedicated to tracking the receipt and use of amounts associated with that
specific grant.

In PCS Fund, all accounting is done within the context of
various funds. When PCS Fund is set up, a General Fund (also called
the Current Unrestricted Fund) is created. The creation of other funds is
left to the user and is optional. The number of funds that can be created
is not limited.

All accounting transactions recorded using PCS Fund includes a
fund number. This allows the user to fully record and examine all
accounting activities of the the entire organization and of any particular
fund or class of funds.

The “value” of a fund isdetermined by its net assets. This
corresponds to the equity of a for-profit organization. The net assets of
a fund are also commonly referred to as its “fund balance.” The current
net assets of a fund is the difference between its income and
expenditures for the current fiscal year. The sum of the current net
assets and the year-end net assets at the end of all preceding years in
the life of the fund make up its net assets. Another way of looking at net
assets is that the net assets are the difference between the assets and
liabilities of a fund. The current net assets are then the difference
between the assets and liabilities at present minus that difference at the
end of the last fiscal year.

Fund Classes

The Financial Accounting Standard Board (FASB) prescribes three classes
of funds. Financial reports should be available the describe the financial
position of the organization in which all funds are grouped together and
consolidated under these classes. PCS Fund complies with these
requirements.

Unrestricted Funds

Unless a donor or grantor (an outside entity) has placed legally
binding restrictions on the use of contributions to a fund, the fund is an
unrestricted fund. The General Fund is the prime (an mandatory) example of
such a fund. Other funds the user may create that will fall into this
class would include funds created by the organization (not an outside
entity), funds established to handle amounts loaned from other funds
within the organization or a fund created to monitor the receipt and use
of funds from an endowment. Income from sales, gains on investments,
member dues or rental fees would be credited to the General Fund (or a
least to an unrestricted fund).

Temporarily Restricted Funds

Most funds that receive donations that are targeted for particular
uses, which donations are legally binding, fall into the Temporaily
Restricted class of funds. The main feature of this class of funds is that
eventually, the assets of these funds will be transferred to and spent by
an unrestricted fund. For example, a grant may be received to provide
support to a clinic operated by the organization. Although care must be
taken to insure that these monies are spent only in support of the clinic,
the expenditures, will, according to best accounting practices, be made by
the General Fund. (The fact that the user may not actually do this in
PCS Fund does not change the fact that this is what should be done.)
Subsequently, amounts are transferred out of the temporarily restricted
grant fund into the General Fund to cover the expenditures.

Generally accepted accounting practice (Statement of Financial
Accounting Standards No. 117) for not-for-profits prescribes that only the
unrestricted class can incur expenses. PCS Fund does not enforce
this, but does make it easy to make inter-fund transfers to maintain
compliance with this rule.

(Permanently) Restricted Funds

Premanently restricted (here, just Restricted Funds) are funds
established to manage monies received that cannot the expended by the
organization. A primary example of such a fund is one that is used to
record an endowment given with the stipulation that the principal must be
left intact – only the interest generated by investing the gift can be
used. The idea behind this class is that, while the donated monies are
owned by the organization, they can never be used except to generate
additional income (that can be spent through the General Fund) through
investment gains or interest.

Pledges, Contributions, Donations and Dues

A feature of not-for-profit accounting that diverges from for-profit
accounting is the treatment of pledges. Generally approved practice
dictates that pledges be treated as an asset of the organization. (In
for-profit accounting, sales orders would be a close equivalent to a
pledge. Sales orders typically do not appear on a company’s books.) If an
organization obtains a written pledge — a pledge that is considered
binding on the pledger — the organization is obligated to enter the
pledged amount into the organization’s books. However, pledged payments
are often spread out over a period of years and the organization is
allowed to discount out-year amounts. PCS Fund permits pledges to
be categorized as binding or non-binding and, for binding pledges,
performs the required discount calculations for the user. It is one of the
few fund accounting packages to do so.

For-profit companies realize income mostly through sales.
Not-for-profit organizations receive income from a variety of sources
including contributions, grants, member dues, receipts of donated goods
and sales from bookstores and gift shops. PCS Fund has forms
dedicated to these type of revenue transactions allowing for
straightforward entry and tracking of such revenue streams.

Inter-Fund Accounts

An essential feature of fund accounting is that, for each fund, the
books must balance. This requirement makes fund accounting a bit more
complicated than for-profit accounting, where balance is needed only for
the entire organization. (It also means that common practices in
for-profit accounting like the tracking of cost centers will not suffice
when dealing with funds in not-for-profit organizations.) In practice,
transactions often occur in which one fund buys, sells, gives away or
receives something on behalf of another fund. In fact, following the SFAF
No. 117 rule that all expenses are incurred by the General Fund, such
transfers between funds is mandatory if any other fund is to do anything
with its money.

In order to keep track of inter-fund loans, and to make sure the
balance sheet for each fund remains in balance, Due-From/Due-To accounts
are required. In PCS Fund, each fund has an asset Due-From/Due-To
(receivable/payable from other funds). A fund’s Due-From/Due-To account is
created whenever a fund is created.

(Note: In PCS Fund, Due-From/Due-To accounts are not directly
accessible by user. Their balances are maintained automatically by the
program.)

To see the roll Due From/Due To accounts play in fund accounting,
consider the following examples:

Example — A Purchase

A purchase is made on behalf of a fund (in this case, Fund #1) for
something (in this case, telephone service) for which other funds are
partially responsible. In PCS Fund’s AP Transaction window, the
form’s header allows the fund responsible for the purchase to be set. In
this case, the responsible fund is Fund #1. Each detail line in the AP
form allows a Detail Fund to be specified. The Detail Fund is the fund on
whose behalf the Header Fund is making the purchase. Thus the phone bill
could be paid for by the Header Fund (Fund #1), but Fund #1 and another
fund, say Fund #2, could be specified in the details as Detail Funds that
actually used the phones and are responsible for portions of the phone
expense. In the journal, the transaction is as follows:

Account Activity

Fund Specified in Journal

Debit

Credit

Accounts Payable

Header Fund (Fund #1)

395

Phone Expns Acct (Fund #1)

Detail Fund #1

325

Phone Expns Acct (Fund #2)

Detail Fund #2

70

At this point, the transaction as a whole is balanced, but the funds
are out of balance. To correct this problem, we need a Due-From/Due-To
transaction to track the fact that the Fund #1 has incurred the payable of
$70 on behalf of Fund #2. (In effect, Fund #1 has made a loan of $70 to
Fund #2.) Thus the following postings must also be included in the
transaction:

Account Activity

Fund Specified in Journal

Debit

Credit

Fund #1 Due From/To Acct

owed by Fund #2 to Fund #1

70

Fund #2 Due From/To Acct

owed to Fund #1 from Fund #2

70

(PCS Fundautomatically generates these inter-fund loans
whenever transactions involving different funds are entered. The resulting
journal entries are seen in both reports and in the transaction entry
forms so that the user can see exactly what is occurring. The automatic
creation of these Due-From/Due-To journal entries insures that fund
balances are always maintained.)

Continuing with this example, when the bill is paid, it should be paid
from the Fund #1’s bank account. No Due-From/Due-To’s entries need to be
generated in the cash payment transaction. The payment transaction
postings are:

Account Activity

Debit

Credit

Fund #1 Bank Acct

395

Accounts Payable (Fund #1)

395

Example — An Inter-Fund Loan

In the previous example, Fund #1 paid Fund #2’s phone bill and thus,
Fund #2 has incurred a debit to Fund #1. In effect, in that example, Fund
#1 loaned $70 to Fund #2. At some point, Fund #2 should repay Fund #1 this
amount. An inter-fund loan transaction is made to reverse the results of
the purchase just described.

Account Activity

Due-From/Due-To

Debit

Credit

Fund #2 Due From/To Acct

owed by Fund #1 to Fund #2

70

Fund #1 Due From/To Acct

owed to Fund #2 from Fund #1

70

Fund #1 Bank Acct

70

Fund #2 Bank Acct

70

The net result of the purchase, payment and inter-fund loan is:

Account Activity

Debit

Credit

Fund #1 Bank Acct

325

Fund #2 Bank Acct

70

Phone Expns Acct (Fund #1)

325

Phone Expns Acct (Fund #2)

70

PCS Fund facilitates all of the activities described here by
allowing funds to be chosen in both the header and the details of each
relevant window. Inter-fund loans (and, when needed, inter-fund transfers)
can be created using a special form accomodating cash transfers between
banks either by automatic withdrawals/deposits or by bank drafts (checks)
and deposit combinations.